Fed Minutes Don't Explain Market Gloom

I am having a hard time fathoming the market's manic and ultimately negative move in Wednesday's session after the Federal Reserve released minutes from its July meeting. But I am chalking it up to the fact that people are still spooked by the prospect that the Fed will taper stimulus, and that they just want to sell.

Frankly, I'm starting to think some of this selling also has to do with the unknowns surrounding that Goldman Sachs (GS) options trading error. That still needs to be unwound -- along with, perhaps, a newly announced investigation of JPMorgan Chase (JPM), which now has the involvement of the Federal Bureau of Investigation. JPMorgan is being accused of energy-price manipulation, among other things.

Getting back to the Fed, if you read the Fed minutes, in my view nothing in it gave any indication of imminent tapering. There was absolutely nothing in there that indicated the Fed would raise interest rates any time soon, either. An interest-rate rise is completely off the table at this point, but I admit that the tapering is probably going to happen soon. This had been Chairman Ben Bernanke's plan to begin with, and all members of the Federal Open Market Committee seem to be on board with it.

Having said that, I remain convinced that tapering is not bearish. It simply means that, rather than the Fed removing $85 billion per month worth of interest-bearing securities, those securities will now remain in the private sector generating interest. What's so bad about that?

The S&P 500 has now pulled back about 3% from its highs earlier this month as it has discounted the next Fed move. That's a smaller pullback than the one we saw in June -- but the June move had been totally understandable, since we saw a pretty sharp net drain in fiscal injections over that period.

Remember, when the government takes money out of the economy, a liquidation type of event is always possible. People and businesses have to pay taxes; that liability, unfortunately, does not go away. However, if the funds to pay those taxes become scarcer via reduced government spending or the running surpluses, the private sector is forced to raise cash, and that means it will need to sell.

This month has been a different story. We have seen a pretty much normal return to federal spending levels, and those fiscal injections should "float the boats" pretty soon. In fact, I would say a lot of firepower is building up at the present time. It just may be a question of investor confidence.

Were it not for the coming budget and debt-ceiling negotiations, I'd personally be extremely aggressive buying stocks in here. For now, however, I am a bit more cautious out of respect for the turmoil that the political environment could bring. I don't know what the outcome will be, and I am not convinced that something catastrophic can't happen.

As for higher interest rates, this issue does not bother me for reasons I have explained here many times. For every debtor there is a creditor, so while a change in rates may hurt one side, another side benefits -- and that means the net result is, at worst, neutral. But, if you ask me, I'd say the income effects outweigh the higher-interest-expense effects. That's simply because it's better to get income, which is an asset, than it is to receive credit. The latter may give you an asset, but it comes with a concomitant liability.